STRENGTHS

Special relations with the United States (preferential trade agreements)

Agricultural, mining and tourism resources

Discussions with the IMF to renew the aid program

WEAKNESSES

Dependence on the US economy (exports, FDI and expatriate remittances)

Dependence on imported fuels and cereals (maize is the staple food)

High crime and corruption in the context of poverty and drug trafficking

Significant informal economy: 70% of the working population is affected

Risk assessment

An activity driven by demand

Growth is expected to be stable in 2019 compared to 2018, driven by the favourable economic situation in the United States via exports and remittances from expatriate workers. The decline in coffee exports in 2017-2018, linked to poor weather conditions and labour shortages, in a context of low prices, is not expected to continue in 2019: these exports are expected to pick up again, supported by a slight recovery in prices following the drought in Brazil in autumn 2018. In addition, exports of manufactured goods (particularly textiles and electronics) will be dominated by the production of maquilas, production areas dedicated to exports, and will be supported by the dynamism of US activity (the United States is the country’s main partner).

The construction sector is set to continue benefitting from the government’s public infrastructure development plans. The Honduras 2020 plan is expected to stimulate investment in six key sectors (including communication and tourism services, intermediate goods production, and agribusiness), despite slow implementation. However, political uncertainty following the disputed presidential elections in November 2017 will weigh on investor and householdconfidence.

Private consumption should be boosted by high remittances from the United States linked to the low level of local unemployment, while the consequences of the revocation of the Temporary Protected Status by the Trump administration (50,000 people concerned, low share of Honduran migrants in the United States) by 2020 are still uncertain. Monetary policy will remain accommodative (key rate at 5.5% since 2016), promoting credit growth (+9% in 2017). Inflation is expected to be contained in the central bank’s upper target band (4 +/-1%), driven by higher fuel prices.

Healthy fiscal situation and a current account deficit financed by FDI and international donors

The three-year IMF agreement, which expired in December 2017, made it possible to consolidate public spending through the introduction of a fiscal responsibility law, setting a ceiling of 1% of deficit for the non-financial public sector in 2020. New discussions to renew the IMF program since August 2018 are expected to maintain fiscal consolidation targets in 2019. The deficit is expected to remain stable despite the decline in revenues due to the introduction of new tax exemptions for companies and the reduction in customs duties collected under the customs union with Guatemala and El Salvador. Further deficit reductions depend on the continuation of the project to restructure the national electricity (ENEE) and telecommunications companies. In this context, the risk on the debt – which is 60% concessional – remains low.

The trade deficit is expected to grow as imports increase with rising oil prices and increasing demand for intermediate goods in the textile sector. The income balance will be in deficit due to the repatriation of dividends from foreign companies. Remittances from expatriate workers, less dynamic than in the past, will only partially offset these deficits, and the current account balance is expected to fall slightly. It will be financed by loans from international donors and FDI, directed towards the financial, insurance and business services sector, as well as maquilas. The lempira is expected to continue on a downward trend, as are all emerging currencies, within the limit of a 7% depreciation against the target set by the central bank.

A still unstable political situation

The November 2017 presidential elections were won by outgoing President Juan Orlando Hernandez (Partido Nacional), with a short lead over opposition candidate Salvador Nasralla (Alianza de Oposición contra la Dictadura). Criticized for its lack of transparency by various international bodies, the electoral process was followed by several weeks of violence as the opposition contested the results despite the official announcement of Hernandez’s victory by the Electoral Tribunal. A national dialogue process began in August 2018 under the aegis of the United Nations to try to find a solution to the crisis.

These political uncertainties are compounded by the challenges posed by high poverty (39% of households live in extreme poverty and only 25% benefit from social security), the high level of violence associated with drug trafficking (especially with the maras, armed gangs), as well as corruption (Rosenthal drug money laundering case in 2015) and migrations, limiting the country’s development. Regarding diplomatic relations, a step towards greater regional integration has been taken with the establishment of a customs union with Guatemala and El Salvador. A free trade agreement has also been signed with South Korea.